Question

Exercise 4.31

The Sandhill packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are listed here:

		Material			Estimated
Product		Cost			Sales
Super Premium		$	10.50		2,100		tonnes
Premium			8.50		2,700		tonnes
Economy			7.00		5,000		tonnes

The fixed cost of operating the machinery used to package all three products is $11,000 per year. In the past, prices have been set by allocating the fixed operating cost to products on the basis of estimated sales in tonnes. The resulting full costs (material costs plus allocated fixed operating cost) are then marked up 100%. The Sandhill has received an offer from a foreign firm for 1,000 tonnes of the premium-grade feed. Sales to the foreign firm would not affect domestic sales but would require a $1,900 increase in fixed production costs.

(c) Using only quantitative information, what is the minimum price that the Sandhill’s managers should be willing to accept from the foreign firm?

Answer 1

Calculation of minimum price $ Material Cest Ueeex'8.5) 8500 Increased fixed production Cost = 1900 Increased total cost ) lo hoe Hence Minimum price le, yoo looo $10.4/tonne or $ 10,400 for full order . cs Scanned with CamScanner